On technical analysis

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Geraldine Parsons
7 years ago
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1 On technical analysis

2 Technical analysis: The concept Technical analysts believe that, in the long run, prices move towards their fundamentals. The flow of information is random, however, the market is slow to respond, thus, generating recurring patterns. It pays to exploit these patterns before others can identify them, provided we can recognize them as they emerge. Recurring patterns tend to self-destruct.

The flow of information is random, however, the market is slow to respond, thus, generating

3 Technical analysis: Classification Charting Sentiment Indicators Flow of Funds Indicators Market Structure Indicators Miscellaneous

4 Charting The Dow Theory: Primary trends, intermediate trends, minor trends, support levels, and resistance levels are analyzed to produce buy or sell signals.

5 The wisdom behind the Dow Theory On January 31st,1901 Charles H. Dow wrote in the Wall Street Journal: "A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market."

marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a

6 The Six Commandments 1. The Averages Discount Everything. An individual stock's price reflects everything that is known about the security 2. The Market Is Comprised of Three Trends: Primary trend, Secondary trends, and Minor trends. 3. Primary Trends Have Three Phases. The First phase is made up of aggressive buying by informed investors in anticipation of economic recovery and longterm growth. The Second phase is characterized by increasing corporate earnings and improved economic conditions The Third phase is characterized by record corporate earnings and peak economic conditions 4. The Averages Must Confirm Each Other. Ex: The Industrials and Transports must confirm each other in order for a valid change of trend to occur. 5. The Volume Confirms the Trend. 6. A Trend Remains Intact Until It Gives a Definite Reversal Signal. Source: equis.com

The First phase is made up of aggressive buying by informed investors in anticipation of economic recovery and longterm growth.

7 A classic buy signal Follow the movements of a stock or market index 4. Break up (above the bounce high) 2. Bounce 1. Market low 3. Pullback

8 Buy signals: Variations Follow the movements of a stock or market index 4. Break up (above the bounce high) 2. Bounce 1. Market low 3. Pullback

9 A classic sell signal Follow the movements of a stock or market index 1. Market high 2. Pullback 3. Bounce 4. Break down

10 Sell signals: Variations Follow the movements of a stock or market index 3. Bounce 1. Market high 2. Pullback 4. Break down

11 The Dow Theory: Support and Resistance Think of security prices as the result of a head-to-head battle between a bull (the buyer) and a bear (the seller). The bulls push prices higher and the bears push prices lower. The direction prices actually move reveals who is winning the battle. Source: equis.com

seller). The bulls push prices higher and the bears push prices lower.

12 More on support and resistance levels... Source: equis.com

13 More on support and resistance levels...

14 Japanese candlesticks: Bullish signals Long white (empty) line Hammer Piercing line Morning star Bullish engulfing lines Bullish doji star

15 Japanese candlesticks: Bearish signals Long black (filled-in) line Hanging Man Dark cloud cover Bearish engulfing lines Evening star Shooting star

16 Sentiment Indicators Trin Trin = Vol(declining)/Vol(advancing)][Number(declining)/Number(advancing)] If >1 market is bearish (reported in the Wall Street Journal) Odd-lot ratio odd-lot-ratio = odd-lot buys/odd-lot sales Odd-lot traders are believed to miss key market turning points; hence when they buy it is likely that the bull market has already missed its course. A ratio > 1 is a bearish signal. (reported in the Wall-Street Journal) Barron's Confidence Index BCI= avg yield on high grade bonds/avg. yield on top ten intermediate grade bonds; An increase in the index signals a bull market, a decrease of the index signals a bear market; The index is always less than one Put/Call ratio PCR= outstanding put options/outstanding call options A ratio over one signals a bearish market Mutual fund cash positions Measure the sentiment among investors who are believed to be poor market timers. An increase in these cash positions shows the funds concerned about falling markets, hence, sending a bullish signal.

A ratio > 1 is a bearish signal. (reported in the Wall-Street Journal) Barron's Confidence Index BCI= avg yield on high grade bonds/avg.

17 Flow of Funds Indicators Short Interest could be an indicator of future latent demand for stock, or it could signal "informed" selling by institutional investors.

18 Market Structure Indicators Moving averages They signal a bear market when they go above current market prices, or a bull market when going below current market prices. Market breadth It measures the extent to which movements in the market index is representative of the individual stock price movements. MB = Number of advancing - Number of declining. Relative strength It measures the extent to which a security has outperformed its industry or the market.

Market breadth It measures the extent to which movements in the market index is representative of the individual

19 The Superbowl Rule: Miscellaneous In a year that an original NFL team wins the Superbowl the mrket is likely to rise for the rest of the year. The opposite is true when a AFC team wins the Superbowl. The Presidential Cycle Rule: In the second year of the presidential term, the market is likely to fall, and in the third year it is likely to rise. The Hemline Indicator: The market index tends to rise and descend with the hemline of women's dresses. Etc.

The Presidential Cycle Rule: In the second year of the presidential term, the market is likely to fall, and in

CHART PATTERNS. www.tff-onlinetrading.com

CHART PATTERNS. www.tff-onlinetrading.com CHART PATTERNS Technical analysis, as you have seen in our Trading Academy videos so far, is not just about charts. It does, however, rely heavily on them and often uses chart patterns to assist in making